This week began with a reveal of the largest information leak in history. Documents and emails from Mossack Fonseca, a Panamanian law firm, were uncovered and for the past year hundreds of journalists worldwide discreetly analyzed their contents. The result: insight into how the world’s powerful and wealthy hide their business dealings (and avoid taxation) using offshore havens and shell companies.
Mossack Fonseca is a law firm that specializes in creating shell companies for those that want to utilize strict privacy laws in certain countries, such as Switzerland and Panama. An anonymous source contact the German newspaper Süddeutsche Zeitung with documents from the law firm. The newspaper partnered up with the International Consortium of Investigative Journalists and over 100 media partners to scour the data.
There are numerous reasons why individuals may want to conduct their business in a country with strict privacy laws. They can be simplified into the three C’s:
- Corporate tax avoidance and evasion
- Government corruption
- Criminal activity
As a case in point, let’s consider the case of certain bankers in Iceland. The financial crisis of 2008 hit the country hard, but prior to that the Icelandic banking industry was rolling. According to the Panama Papers, certain bankers in Iceland made unsecured loans to one another to boost the banks’ books and thereby pump up the share prices of the banks. The bankers setup private offshore businesses for these unsecured loans in an effort to hide the true purpose of the loans. The shell companies provided the necessary cover to help create a bubble in Iceland; one which eventually popped and filtered its way around the world.
Another abuse of privacy laws is the ability to launder money, as in the example of Sergey Roldugin, an associate of Vladimir Putin. Mr. Roldugin is alleged to have used offshore accounts to launder hundreds of millions of dollars. It is possible that Roldugin is a front-man for a network of Putin loyalists, and is not, himself, the true beneficiary of the funds.
It’s likely that we’ll see many further investigations into possible illegal actions by those named in the Panama Papers. The US Department of Justice issued a statement that they have initiated a review of the documents.
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— Lance Gunkel, CFA, CFP®